14.1 Application Form Vs Transaction Slip
Application Form
The application form provides the required information about an investor in a mutual fund. Once filled out, the details are entered into the RTA records, and a folio number is assigned to the investor. A folio acts as a unique identifier for an investor, similar to a bank account number, and can hold units from multiple schemes of a mutual fund.
In the application form, the investor must fill out various mandatory fields, including personal details, bank account information, and other relevant declarations. These fields are validated before the application is accepted by the mutual fund. The mandatory fields are:
- Investor status (resident/non-resident)
- Bank account details (pay-in and pay-out)
- Complete address of the first holder
- Date of birth and guardian details for minors with documentary proof
- PAN/PEKRN details
- Signature of applicants
- Scheme, plan, and option selection
- Nomination or declaration of opt-out
- FATCA/CRS, UBO, NPO declarations
- Declaration on Email/Mobile relating to communications
- Any other documents mandated by SEBI/AMFI
Transaction Slip
The application form is primarily for first-time investments. For subsequent transactions, investors can use a transaction slip, which includes a pre-printed folio number. The slip allows investors to carry out various transaction types such as redemptions, additional purchases, switches, and non-financial changes like updating address or bank details.
Transaction slips come with the investor’s folio and account number pre-printed. Investors can either use a pre-printed slip or a blank one, available at AMC branches, distributors, and ISCs, where they can write their folio number manually.
14.2 Purchase Transactions
Purchase of Mutual Fund Units
Mutual fund units can be purchased during the New Fund Offer (NFO) or after the scheme opens for on-going offer (if open-ended). When a new investor applies for units either during NFO or after the scheme opens, it is called a fresh purchase.
To make a fresh purchase, investors must submit an application form, complete in all respects, along with the payment instruments. The following checks must be done when a payment instrument is received:
- The scheme name must be mentioned on the instrument and must match the one on the application form.
- The cheque date must be current (not stale or more than 3 months old).
- The cheque should not be post-dated.
- The amount in words and figures must match the investment amount.
- The cheque must be signed by the investor or guardian in case of a minor investor.
- The cheque should not be mutilated.
Subsequent Purchase (Additional Purchase)
After the initial purchase, every subsequent purchase made by the unit holder is called an additional purchase. Investors can make additional purchases using a transaction slip.
If an existing investor decides to make additional purchases under a new folio, it is considered a fresh purchase.
Steps Involved in Purchase Transaction
The steps involved in a purchase transaction are:
- Investor transaction is accepted by Investor Service Centres (ISCs) or AMC offices.
- The transaction is intimated to the RTA back office.
- Units are added (purchase) on realisation of funds or reduced (redemption) in the folio of investors.
- Inflow and outflow resulting from transactions are reported to the AMC Treasury.
- Units issued and redeemed for the day are consolidated.
- Unit capital is updated for the increase/decrease due to transactions.
- Unit capital is communicated to AMC fund accounts.
- The portfolio is valued by fund accounts or custodians.
- NAV computation is done using the portfolio value and updated unit capital.
- NAV is communicated to RTA for applying to investor transactions.
Entry Load
Entry load is a percentage of the NAV of the unit. In an NFO, the load is charged as a percentage of the face value. Entry load increases the price at which an investor buys units. Therefore, for the same amount invested, units allotted to investors paying a load are fewer compared to units allotted without a load.
It is important to note that SEBI abolished the entry load with effect from August 1, 2009. However, the concept of entry load should still be understood.
14.3 Redemptions and IDCW (Dividend) Payouts
Redemption Process
After the NFO, when a scheme re-opens, the continuous offer is available for both purchase and redemption of units. Redemption refers to the investor’s request to return their investments in a fund.
In open-ended funds, on redemption, the units are extinguished or cancelled and are not re-issued. This alters the unit capital of the open-ended scheme, which is updated by the RTAs after processing all transactions.
In closed-end funds, redemption happens only on the maturity date, but may be allowed during specified periods in Interval Funds.
Redemption Specifications
Investors can specify the redemption of units either in terms of number of units or as an amount in rupees. They must ensure that their holding is sufficient to meet the amount.
Redemptions must meet the minimum amount or unit requirements specified in the offer document. Mutual funds may also specify the minimum balance to be maintained in the folio after redemption.
Redemption Proceeds
Investors need to indicate their preference for receiving redemption proceeds, which can be paid by cheque or through direct credit. As per SEBI’s mandate, the bank account details should be printed on the redemption cheques to prevent fraudulent encashment.
For multiple purchase dates, the redemption will be made on a “first-in-first-out” basis. Redemption proceeds are paid by the AMC’s paying bank, or if the AMC’s paying bank is unavailable, demand drafts are used.
Alternate Payment Modes
AMCs may use alternative payment modes like RTGS, NEFT, IMPS, direct credit, etc. for payments, including refunds to unitholders.
Instant Access Facility (IAF) is available for Overnight and Liquid schemes, which allows for same-day redemption credit, subject to limits for resident individual investors.
NRI Redemption Proceeds
Redemption proceeds for NRI investors are governed by RBI regulations. For investments made from NRE or FCNR accounts, payment can be made on a repatriation basis, whereas investments from NRO accounts are non-repatriable.
Capital gains arising from NRI redemptions are subject to tax deduction at source.
Exit Load
Exit load is a percentage deducted from the redemption price for the investor. If the investor has specified the redemption in units, the redemption value decreases due to the load.
For example, at an NAV of Rs. 20 per unit, redeeming 1000 units would result in Rs. 20,000. With a 1% exit load, the redemption price is Rs. 19.80 per unit, and the proceeds would be Rs. 19,800 for 1000 units.
Exit loads are subject to SEBI limits and must apply equally to all investors. AMCs cannot charge differential exit loads based on transaction type or investor type.
14.4 Account Statements for Investments
14.4.1 Statement of Accounts (SoA)
The Statement of Accounts (SoA) is a proof of investment for the investor. It is sent when an investor makes a fresh purchase transaction, showing the amount, price, and units. For subsequent transactions, the balance units in the folio and their current market value are also shown.
RTAs dispatch SoAs to investors whenever there is a transaction in a folio. The SoA must be sent within 5 working days of the transaction. For NFOs, the SoA is sent within 5 working days after the closure of the NFO or from the date of receipt of the request from unit holders.
SoAs are issued monthly if there is a transaction in a folio. If no transactions occur in a folio within a 6-month period, the SoA is sent annually. For systematic transactions, SoAs are sent every quarter (March, June, September, and December).
14.4.2 Consolidated Account Statement (CAS)
AMCs/RTAs share information with Depositories to generate the Consolidated Account Statement (CAS) for investors. CAS is consolidated based on the PAN and includes all mutual fund investments and demat accounts held by the investor.
CAS is sent to the investor’s email monthly if there is any transaction in the mutual fund or demat account. If there are no transactions, a half-yearly CAS with holding details is sent. The CAS is dispatched on or before the 18th/21st of April and October for the previous half-year.
Investors may opt to receive CAS in physical form if they do not wish to receive it via email.
Grievance Redressal Mechanism
AMCs and RTAs are responsible for the authenticity of the information provided in the CAS. A grievance redressal mechanism is in place to handle any complaints. Information regarding grievance handling is also communicated through the CAS.
14.4.3 Negative Consent Option
If an investor does not wish to receive CAS from Depositories, they have the option to opt-out by providing negative consent. In such cases, the depository will inform the AMC/RTA, and the data will not be shared with the depository for CAS generation.
14.4.4 Family Member Consolidated Statement
RTAs provide a consolidated account statement for all mutual fund investments across different AMCs. The statement can also be provided for all family members having a common email ID.
14.5 Switch
What is a Switch?
A switch is a redemption and purchase transaction rolled into one. The redeeming scheme is called the source scheme, and the purchasing scheme is the target scheme. This process is known as an inter-scheme switch.
Switches can also occur from one option to another within the same scheme. For example, an investor can switch from a growth option to a payout of income distribution cum capital withdrawal option.
Switching saves time and effort for investors as it eliminates the need for multiple transactions.
Steps in a Switch Transaction
- Fill a redemption request and submit it (Day T)
- Receive redemption cheque and deposit it in bank (Day T+3/T+4)
- Receive cleared funds in bank account (Day T+5)
- Fill a purchase request for the desired scheme and submit with a cheque (Day T+5)
The above steps, which typically span five days, are consolidated into a single transaction with a switch request. The transaction is processed by the RTA, and funds are credited to the target scheme.
Exit Load in a Switch
Entry and exit loads are applicable during a switch transaction. If an exit load is charged, the redemption price will decrease, and the redemption proceeds will be reduced accordingly.
Switch transactions are subject to long-term or short-term capital gains based on the holding period and the type of scheme.
14.6 Systematic Transactions
What are Systematic Transactions?
Systematic transactions include:
- Systematic Investment Plan (SIP)
- Systematic Transfer Plan (STP)
- Systematic Withdrawal Plan (SWP)
These transactions are executed at the applicable NAV on the date of transaction. In case of transfers, each leg (redemption and purchase) is executed at the applicable NAV for each scheme.
14.6.1 Systematic Investment Plan (SIP)
SIP is a recurring investment plan that allows investors to make periodic investments in mutual fund schemes. It works similarly to a recurring deposit with a mutual fund.
Investors commit to a periodic investment over a chosen period, and AMCs offer SIP options on specific dates (5th, 15th, or 25th of a month). The first installment is at the NFO price, and subsequent installments are based on the NAV of the scheme once it reopens.
14.6.2 Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP)
SWP allows periodic redemptions from an existing scheme, while STP allows periodic transfers of fixed sums from one scheme to another. STP can be used to periodically book profits or for income, especially by retirees.
For both SWP and STP, the redemption or transfer happens at the applicable NAV for the respective date. In case the transaction date falls on a non-business day, the transaction is executed at the NAV of the next business day.
Fixed and Appreciation Options
SWP can have two options:
- Fixed option: Withdraw or transfer a fixed amount each time.
- Appreciation option: Withdraw or transfer the appreciation amount from the original investment.
Some funds also allow investors to determine the amount to be transferred based on the pre-defined target value of the target scheme.
14.7 Turn-around-times for Various Financial Transactions with Mutual Funds
Turn-around-times (TAT)
SEBI has mandated timelines for various mutual fund transactions. These are designed to ensure timely and efficient processing of transactions. Here are the standard timelines:
| Service Provided by Mutual Funds | Turn-Around-Time (TAT) |
|---|---|
| NAV Calculation and Disclosure | On a daily basis |
| NFO (Other than ELSS) for Subscription | Maximum of 15 days |
| Allotment of Units / Refund Money after NFO | Within 5 business days of NFO closure |
| Redemption/Re-purchase Cheques | Within 3 working days |
| Dividend (IDCW) Dispatch | Within 15 days from the record date |
| Unit Certificate Issue | Within 5 working days of request |
| Systematic Transactions (SIP, STP, SWP) | Within 10 working days of the first transaction |
14.8 Role of RTA in Commission Payment
Commission Payment by RTAs
The Registrars and Transfer Agents (RTA) play an essential role in the calculation and payment of commissions to mutual fund distributors. The RTA is involved in several activities such as:
- Determining average assets for trail commission payments
- Transaction charges deductions and payments
- Identifying transactions sourced from T-30 or B-30 locations based on pin codes
- Calculating clawbacks and reversals, if any
- Identifying SIP inflows from new investors for upfront commission payment
SEBI has mandated mutual funds to adopt a full trail commission model for all schemes, with no upfront commission payments except for SIP investments. The upfronting of trail commission is allowed only for SIPs of up to Rs. 3000 per month, per scheme, for first-time investors. These commissions are paid by the AMC and amortized over a maximum period of three years.
RTAs ensure that proper systems are in place for commission tracking and that a complete audit trail of commission payments is available for inspection.
